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2000 AND BEYOND

Quality beef and grading system changes are needed as the industry heads into the 21st century.How can eastern Corn Belt feeders compete with High Plains production systems that usually consider beef a commodity?Michigan State economist Stephen Koontz has strong opinions on the subject as he discusses two beef systems emerging in this country:*The "Commodity or High Plains Model" where everybody handles

Warren Kester | Feb 01, 1998

Quality beef and grading system changes are needed as the industry heads into the 21st century.

How can eastern Corn Belt feeders compete with High Plains production systems that usually consider beef a commodity?

Michigan State economist Stephen Koontz has strong opinions on the subject as he discusses two beef systems emerging in this country:

*The "Commodity or High Plains Model" where everybody handles a similar product and the low-cost producer survives.

* The "Quality Beef System" which is product and revenue based. "Here the focus is on providing a quality beef product and pricing it properly," he says. "This could be the model for the eastern Corn Belt, but because it doesn't have to happen, it may involve fewer numbers of cattle."

In comparing feeding in the Corn Belt with larger feedlots and packers located further west in the High Plains, Koontz says, "They have a size advantage which translates into cost advantages. Bigger is cheaper in a commodity system. The weather is also good. Animals perform better, but feed is more expensive. "

Growing Opportunity However, commodity systems have no, or at best low, potential for growth, Koontz believes. Why? Since 1979, the industry has sold the same amount of beef per capita at declining real prices, or fewer numbers at similar real prices. This trend clearly reflects consumer health concerns and dissatisfaction with quality, consistency and convenience of our product, he adds.

On the other hand, the quality systems hold the potential for industry growth, Koontz believes. "It could also address the demand problem," he adds. "Diet and health concerns are not really addressable, other than food safety. Quality and consistency, on the other hand, are."

We must price beef based on quality, Koontz contends. We haven't been doing that and that's why the beef industry has a demand problem. Solving this hang-up will make you money and improve market share.

Alliances have been touted as an answer. But they are not the magic bullet. "All cattle cannot be sold through alliances. The market cannot bear it. You can sell beef for $10 a pound, but you can't sell a lot of it," Koontz says.

"To gain back market share, there must be technical progress in the grading system and price discovery to sell a product for what it's worth and communicate that information through the production and marketing system," he says. "This must happen in both the commodity and quality systems."

To reach this goal, more changes in the grading system are needed because consumers aren't communicating through current standards, Koontz believes. He thinks the B-maturity grade change was a good start, but he questions whether privatizing the grading system is the answer. An impartial third party should be involved in the process, he says.

Koontz sees alliances using the Quality Beef System as one way to provide the niche route for profitability in the Eastern Corn Belt. "There needs to be intermediaries, organizations whose best interests are to assure that all sides - packer, feedlot and cow-calf producer - communicate and take steps to improve the quality of their product," he says.

New Alliances Fill Niches Several new alliances have potential. Unlike most breed or packer alliances, these stress source verification back to the producer. Though in the developing stage, the Michigan Beef Alliance is one example. Also coming on line is the Precision Beef Alliance (PBA). This limited-liability alliance started two years ago in the Atlantic, IA, area. It now has 170 members owning from eight to 3,500 cows. The 28 largest feedlots have a total capacity of 54,000 head.

PBA members are mostly from Iowa, but come from as far away as Alabama. This is an attempt to include producers with fall-calving cows to even out marketing numbers throughout the year - a major concern of alliances.

The alliance's ultimate goal is to merchandise a uniform, tasty and palatable branded product that will command premium prices and loyalty from consumers, says Rich Hall, PBA's executive director. But to accomplish these goals, there must be source verification back to the farm and ultimately to the individual dam and sire of each animal, he believes.

"That's something High Plains feedlots can't do," he adds.

Tricia Dalbey, PBA's former beef marketing manager and now staffer at Iowa Cattlemen's Association, puts it another way. "To survive in the 21st century you have to know what you are producing," she says. "You can't manage what you can't measure. You have to know where you are. Maybe it's not practical for you to try to produce a Choice product, but you have to know that. The important thing is to have some information."

PBA members and leaders are confident consumers will recognize the extra quality and consistency of Precision Beef and will pay more for it.

"Certified Uniform Beef steaks were priced $2 per pound higher than Choice beef in a recent Cub Foods promotion, yet created record sales," says Hall. "Based on that difference, we would have returned $8.45 per head premium to a member, and saved him as much as $30 per head in reduced feed costs."

PBA emphasizes on-site carcass data collection. "We pride ourselves in taking actual ribeye and fat measurements," explains Dalbey. "The only information we get from the official USDA grader is marbling score."

Dalbey and a trained crew collected data on more than 10,000 carcasses in 1997, mainly at IBP's Denison, IA, plant and at Beef America, Norfolk, NE, and Greater Omaha, Omaha, NE. The number is expected to swell to 25,000 this year, she says.

Members pay a $6 per head fee for the service, non-members slightly more. In addition, members can access a feedlot index listing service and specifications of member feedlots, such as Silver Creek Feeders near Council Bluffs. They can also use a calf index that lists calves available for sale or to partner with other investors through the feedlot.

Precision Beef fills another criteria of an alliance. It recognizes that these new systems will cost extra money for management, collecting information and learning how to use the data. "These are economies that can come only through central management," Koontz says. "That should be the responsibility of an alliance."

PBA fills that role. Iowa State University technicians have developed a computer program that ties carcass data to individual cow production records.

"It's a search for the optimal cow that does an excellent job of raising her calf in the environment we ask her to, yet produces a calf that is efficient in the feedlot and will bring the most rewards on the rail," Dalbey says.

She and her staff compile a summary report for each member incorporating cow-calf efficiency, feedlot performance and carcass data. She also will visit the farm and review the data if a member requests help.

One thing Precision Beef doesn't do, however, is get involved in price and negotiation arrangements between producer and feeder members. Nor does it require that a member own cattle all the way through the feedlot to receive carcass data. But source verification is required. "That's a significant advantage to our program," Dalbey says.

Source verification and identification systems are critical aspects to alliances and pieces that Michigan's Koontz believes make the long-term outlook for the beef industry optimistic.

Eventually, we have to price animals based on their "in-the-meat" value, he says. "Value-based marketing is just lip service until this is done."

But Koontz also says: "It very much concerns me how, if alliances continue to grow, we'll maintain effective price discovery."